BUSINESS NEWS
Why cash is king for small business By Paul Cunningham, Associate, SMART Business Solutions Cash flow is an essential measure of a business's strength and must be regularly reviewed and improved to ensure the organisation not only survives but thrives. As one of the Associates at SMART Business Solutions, Paul Cunningham knows first-hand how a strong cash-flow position is crucial for business’ ability to weather any storm. Most business owners understand the importance of cashflow, yet often in the day-to-day running of the business, their cash-flow is overlooked due to product or service development, or in their efforts to make another sale.” Paul said. “According to Xero Small Business Insights, only 49.8% of Australian small businesses were cash-flow positive in February of 2020 – before COVID lockdowns. Many business owners respond to negative or low cash-flow with the response of needing to drive sales. Whilst this can help in some circumstances, sales revenue is only one driver of cash-flow. It is imperative that business owners take steps to ensure they are looking at other drivers that may be hurting their cash-flow. In my experience in assisting business owners in improving their cash-flow, the following four actions are crucial to create meaningful change: 1. Understand how the cash-flow in your business works; 2.Prepare a cash-flow forecast; 3.Set a cash-flow improvement plan by setting goals and targets that will result in better cash-flow; and 4.Review the cash flow forecast and monitor your improvement plan.
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GROUNDSWELL MARCH 2021
The first key component to understand is that cash-flow does not equal profit. Payments of GST, loan repayments and the purchase of assets will not affect your overall profit but will absolutely affect your overall cash flow. Similarly, a sale where cash is not yet received will affect your profit but will not affect your cash-flow until the payment is received. The second key component is the cash-flow conversion cycle. It measures the days between when you make payment to your supplier (or other costs to produce a product) to how many days before you receive the cash from your customer. The more days in the cycle, the longer your business is waiting before receiving the reward for funds you have already spent. For example, if after purchasing or producing your product you are unable to sell your product for 30 days, and then your customer takes 45 days to pay you, your cash conversion cycle is 75 days. For many businesses, 75 days is a long time to wait between initial outlay of funds to finally receiving cash in return. If a business can reduce the number of days in the cash conversion cycle whilst maintaining their profit margins and sales, they will benefit with improved cash-flow.
